EU

Is Italy the next black swan?

There are a number of economic issues in the world which could provide the next economic shock and shake world markets. A prime candidate is Italy and its banking. system. Italy in the past has relied on currency devaluation to maintain its international competitiveness. Italy’s entry into the European Union made devaluation impossible and the economy is now in very bad shape. In recent years there has been an accumulation of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. The Italian banks alone have USD 400 billion in bad loans, equal to about 20% of Italian GDP. The Italian economy is ten times larger than the Greek economy and there is no way that the European Union has the ability or capacity to bail it out.

In October or November there will be an Italian constitutional referendum and Prime… Continue reading

Brexit and the investor

The unexpected happened and the UK will leave the European Union! World financial markets have been caught completely off guard. The immediate consequences are significant volatility on world markets and big currency fluctuations.

Other consequences can be expected, including:

  • further falls in world economic growth forecasts.
  • a recession for the UK and the European Union.
  • difficulties for Asian markets exporting to Europe.
  • a lower AUD and lower interest rates for Australia
  • falling commodity prices consistent with lower growth.
  • increased political instability in Europe – more opportunities for Putin
  • other EU countries calling for an exit vote

What can investors do?

The volatility will produce buying opportunities but is the current market exuberance warranted? At this stage it is imperative to stay with the investment plan. A world event such as this is an opportunity for the media to give their “expert” opinions but no one knows what the fall out… Continue reading

Brexit and the bear market

Brexit

So, the UK will leave the European Union!   The issues were very complex and there were merits on both sides of the argument   But in the end, voters obsessed over a frustration with their political leaders, neglected to look at the big picture and evaluate the real economic and political issues.

What lies ahead for the UK is economic uncertainty. By contrast the future for the European Union is much more certain because that organisation is now very unlikely to remain politically and economically stable. It is likely that other members will leave the European Union resulting in a union which is economically and politically feeble. Such political instability is at a time when Europe is under pressure from refugees and the political aspirations of Putin. Will NATO now be strong enough to deter Putin from picking off the Baltic States?

The world is really… Continue reading

A bear or the start of a bull market?

When economic views are very negative then this is often the time for a new bull market to start. Current sentiment is very negative so can we expect a bull market to soon?

Consider the economic and political negatives.
• Falling world growth and falling inflation.
• The inability of central banks to control very slow economic conditions.
• Historically high levels of sovereign debt
• A coming crisis for the European Union, in part due to refugees
• An unknown impact of a changing Chinese economy
• Japan continuing a multi decade recession with little hope of change
• A weakening United States economy.

Of immediate interest is the UK vote to leave the European Union. Should the UK vote to leave the European Union, then it will be weakened economically and there is the likelihood that Scotland would then leave the UK.

 
The European Union is at… Continue reading

The German elections and the European Union crisis

Why is it that European central bankers and politicians seem to be revelling in self-congratulations rather acknowledging the fragile state of the European Union economy? Perhaps the upcoming German elections may explain why the European Union predicament is being set to one side. Certainly the German electorate has become increasing intolerant of the further bailouts of their Mediterranean neighbours, particularly Greece, and Angela Merkel no doubt sees this as a serious barrier to her re-election.

Consider the major issues. Greece has received more than €200 billion in bailouts and despite a haircut on its debt and some measure of austerity there is almost certain to be another haircut because Greece simply does not have the capacity to repay its debts. But even if the latent Greek crisis and the very high unemployment rates across most of the European Union are ignored, the economy and political situations in many Eurozone countries… Continue reading

The European Union crisis is not over!

Why are commentators so positive about a European Union recovery? While there is an increasing body of data suggesting that the worst is over for the European Union, this is based very much on positive figures coming out of Germany and there is a need to consider the economic plight of the other major European Union nations.

In France the second largest European Union nation, the socialist government seems totally unable to solve its economic woes. Recent downgrades by Fitch cut France’s credit rating by one notch to AA-plus came after it had already lost its AAA ratings with S&P and Moody’s last year due to a deteriorating debt outlook and an uncertain economic environment. The concerns noted by the rating agencies included a weaker economic output, a rise in the French unemployment rate, budget deficits and subdued external demand. Mr. Hollande needs to heed the warnings as a matter… Continue reading

World growth and the European Union

World growth continues to decline. The IMF recently lowered its growth projections for this year in America, the Euro zone, China, Brazil, Russia and India. Despite the apparent improvement in the US economy, Europe remains the big concern, notwithstanding the issues in China.

The facts are that Europe’s financial system is in bad shape and little seems to be happening which is likely to improve it. The euro-zone economy has contracted for six consecutive quarters. The IMF expects growth in the EZ to contract by 0.6% this year. The outlook for the European Zone is exacerbated in part due to the continuing slowdown in China. There are problems across many European Union countries with debt and deficits out of control and most having a very limited potential to trade their way out of their problems.

France under a socialist government has continued to deteriorate. It has recently lost its top… Continue reading

September is a critical month for the markets?

September is often a critical month for the markets. With so much economic uncertainty, this September will be very interesting.  There has been little news, good or bad from the EU in almost a month but Europeans are about to return from their summer holidays so things may hot up very soon.

The Troika is due to return to Athens in September and make a ruling on whether to release additional funding to Greece.  In Spain the auditors are due to present their final report on the capital needs of Spain’s financial sector.  No good news expected for Spain or for that matter, Portugal.

But Germany is the key.  Will they continue to pour funds into bankrupt states?  In Germany, the CSU party opposes a further Greek bail out.  While Angela Merkel had support from the opposition SPD and the Greens to get her… Continue reading

France is now the biggest problem in the EU.

After the recent French elections, Francois Hollande now has more power than any other European leader and a free hand to govern how he wishes.  

Hollande is hell-bent on social reform. He has already raised the minimum wage and has made a commitment to cut taxes, raise the top marginal tax rate to 75%, place a tax on wealth, decrease the retirement age to 60 and make it harder for employees to fire employees 

Holland has the potential to cause huge damage to France, to the EU and of course to the world economy.

With a current GDP of 0.3% and a French unemployment rate of more than 10% what is this man thinking?  The public debt now exceeds $2 trillion and the debt to GDP is now 82%.

The current deficit is 3.2% and forecast to be 4.2% next year.  Public spending at 56% of… Continue reading

Greece and the European saga

To look at recent market reactions after the Greek elections on June 17 one could be persuaded that the EU issues have been solved. I very much doubt it!

Assuming that the new Greek coalition can reach agreement they will have to come to grips with an economy which is in serious recession and has a significant sovereign debt which eventually will have to be repaid.   Superimposed on this are the problems that Greece has a very high unemployment rate, a very poor work ethic and an expectation that the handouts from the EU (read Germany) will continue.  Clearly these handouts cannot continue without certain assurances from the new government .  The danger now is that the contagion of Greece will spread to other southern European countries which are much more significant to the health of the world economy.

The volatility on world markets can be… Continue reading

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